Welcome to the new world of Small Business Administration loans.
Once the province of small businesses that typically got quarter-million-dollar loans to buy equipment, it’s been transformed in recent years by regulations and lenders that have joined the market offering both smaller and larger loans to businesses for a wider variety of uses.
Market forces have driven some of the changes, especially the rise of community banks that have turned to SBA lending as a profitable niche to get off the ground.
Other changes have come from the administration itself, which has sought to diversify loans and make it easier for lenders to participate.
The changes have not come without controversy,especially to the SBA’s flagship program, the 7(a) guaranteed loan, which had handled the lion’s share of loans to small businesses.
Two years ago, Congress and the Bush administration restructured the program to make it self-sufficient so that it wouldn’t continue running out of government funds.
Fees were raised as much as 50%, to up to 3.75% of the loan value. This discouraged many businesses from applying.
But the SBA no longer is the staid monopoly of regional banks that made the majority of SBA loans a couple of decades ago,banks that were swallowed up in the wave of consolidation that swept through the industry in the 1990s.
Today, smaller ethnic and community banks have emerged to fill the void, especially those catering to small and midsize businesses. More than half a dozen such banks have formed in the past couple years, including Fullerton Community Bank, Costa Mesa-based Pacific Mercantile Bancorp and Irvine’s Plaza Bank.
The end result: heightened competition and greater access by businesses to SBA loans.
“The idea of more choices and more products for both businesses and lenders is the key to what has happened here,” said Alberto Alvarado, director of the SBA’s Los Angeles District, the largest in the country as measured by dollar volume of loans.
Most of these new banks immediately offered SBA loan products, in part because government guarantees on SBA loans allow them to be easily sold on the secondary market to generate working capital for banks. On the traditional 7(a) loan, the federal government guarantees that 75% of the loan will be paid if the borrower defaults. Other SBA loans have 50% guarantees.
Indeed, competition is so keen among banks to offer SBA loans that officers with experience in the often-arcane world of SBA lending regulations are hard to come by.
Skills required include reading a tax statement with an eye toward finding potential land mines and looking at all aspects of a customer’s ability to repay a loan.
“It’s the $64,000 question in the world of commercial lending,” Tom Dobyns, president of retail banking for Fullerton Community Bank said in an earlier interview. “Finding those people with those kinds of skills is getting fewer and farther between.”
When a new bank opens, it often poaches SBA loan officers from other banks, whose SBA lending operations are then disrupted, sometimes for months.
New players have continued to enter the lucrative market.
Because SBA loans are meant to serve businesses that otherwise wouldn’t meet bank lending criteria, it’s a way to establish relationships with businesses that will likely turn to the same bank for future loans and services. That’s what drew lending giant Washington Mutual Inc. to SBA lending.
“We’ve been trying to go after more business customers because business loans are foundational,” said Gene Perez, small business relationship manager and vice president at Washington Mutual. “Once you make a loan to a business, you can develop relationships with the owners, the employees and even the customers of that business.”
The Seattle-based lender, which is the largest thrift operating in Orange County, didn’t go after the traditional 7(a) loans. It instead chose the SBA express loan program. The SBA has pushed this program in recent years as an alternative to 7(a) loans. It allows banks greater latitude to make smaller loans, but only provides a 50% loan guarantee. It also involves less paperwork.
“We use this express loan program as a counteroffer product for our business loans,” Perez said.
If a borrower doesn’t meet the standard for a conventional loan,especially the requirement to have been running the business for at least two years,Perez said the bank comes back with a counteroffer for an SBA express loan.
Other banks that had primarily focused on the 7(a) program, such as Puerto Rico’s Banco Popular North America, which has its California headquarters in Anaheim, have found they could make more small loans through the Express program.
“We didn’t want to do $50,000 loans under the SBA 7(a) program; it was just too much paperwork,” said Gloria Miller, Western region sales manager for Banco Popular. “By streamlining the process, the express loan program makes it less costly for lenders, which is especially important on smaller loans.”
Fine is staff writer with the Los Angeles Business Journal.
